This blog covers financial, political and other topics the author gets the urge to write about. It does not provide personal financial, legal or other advice. Consider consulting a personal professional adviser before making any decisions. Copyright (c) 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019 by Leonard W. Wang. All rights reserved.

Thursday, April 19, 2012

Predicting China's Economic Performance From Political Scandal

China's political scandal du jour is the downfall of Bo Xilai, former top government official in the southwestern city of Chongjing. (That's the modern spelling of Chungking, the capital of free China during World War II.) Bo, formerly an upwardly mobile political star, was abruptly removed from power when his wife, Gu Kailai, was arrested on suspicion of murdering a British businessman named Neil Heywood. Heywood reportedly was a close associate of Bo and Gu, but apparently had a falling out and may have been eliminated because he knew too much and might reveal it. Good airport novel stuff, and there no doubt already are at least several commissioned (and numerous uncommissioned) film scripts about the scandal being written in Hollywood.

Bo appears like a throwback to Maoist days, promoting populist programs such as affordable housing for the masses and government directed spending to build infrastructure, thus fostering job creation. He also encouraged the singing of revolutionary songs from the Communist era, ordered students and government employees to work stints in rural areas (shades of the Cultural Revolution) and made the local TV station stop running commercials and broadcast revolutionary programming. Bo wasn't a pure Communist. He encouraged foreign investment and tried to attract manufacturing away from its established bases on China's coastline. But his overall approach revived notions of egalitarianism, and his popularity among average Chinese blossomed.

That made Bo a dangerous man--dangerous to the central government in Beijing, which is in the process of trying to engineer a transfer of power to a new generation of leaders. It's unclear that the differences between Bo and his adversaries are ideological; many of his policies are consonant with Beijing's expressed priorities. One suspects that this fight is over power. Bo is the son of Bo Yibo, one of the most exalted doyens of the Communist Party in its early days, and seemed destined by family legacy to rise to national prominence. As his popularity among the masses increased, his ascendency to top leadership could have become inexorable. Evidently, there were some people in Beijing who didn't cotton to that notion.

One of the oddest things about the Bo Xilai scandal is how it's being publicized by the Chinese government. This is basically a bare-fisted brawl in the smoke-filled rooms and back alleys of China's political power structure. In the past, such struggles were conducted in the utmost secrecy. Even today, the civil war that was the Cultural Revolution remains heavily shrouded in mystery. But the Beijing government has publicly announced Gu Kailai's arrest. And interesting details of the scandal--the kind of information that would likely be known by government investigators--seem to have found their way into the Western press. Why would the Party air its dirty laundry?

Most likely, to sway public opinion in China. Democracy, as the term is understood in the West, doesn't exist in China. But Chinese governments since the times of the earliest dynasties have understood that they need the loyalty of the populace. Emperors who lost the support of the people risked being overthrown by peasant rebellions, which had a tendency to flare up if government officials were corrupt and overbearing, and harvests were bad. In such circumstances, charismatic leaders would rise up, acquire popular followings and inspire uprisings. Often, they would embellish their appeals by harking back to the supposed moral uprightness and economic security of earlier times. The bad harvests, they would pronounce, were a sign that the emperor had lost the mandate of heaven, which justified rebellion.

Today's equivalent of a bad harvest is an economic downturn. And the economy has been slowing in China. Employment levels have fallen as Chinese exports faltered after the 2008 financial crisis. Real estate values are beginning to drop, and price inflation is disquieting. China's rapid shift to capitalism has removed most of the social safety net that existed in Communist days, leaving hundreds of millions who grew up with the security of the Iron Rice Bowl in the uncomfortable of role of fending for themselves in the mystifying harshness of the capitalist system.

Bo Xilai might have become a rallying point for China's discontented. Indeed, the press has reported that many in Chongqing continue to support him, if not for attribution. The Party's public destruction of Bo's political career would appear to be a message to the Chinese people that there ain't gonna be no change in the mandate of heaven, at least not if the power brokers in Beijing have anything to say about it (and they have a lot to say about it).

Why would they feel so threatened by Bo? Very possibly because they know that China's economy is headed for a downturn, one that could destabilize the fragile political compromise that holds China together today. Most Chinese don't care for Communism. But they also aren't ardent about fostering Western style democracy. They just want economic stability and an opportunity for a better life. As long as the government in Beijing delivers good harvests, most Chinese won't rock the boat. But if the economy starts to circle the drain, a charismatic leader like Bo Xilai, particularly if located far from the dour bureaucrats in the capital, could take advantage of the hard times in a gambit to seize power. Beijing's public exploitation of the scandal is, among other things, a pretty good indication that it expects China's economy to weaken. Hedge your bets if you're invested in the Central Kingdom.

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